Good morning. My name is Crystal, I will be your conference operator today. Thank you for joining us for this conference call for OFG Bancorp. Our speakers are José Rafael Fernández, President, Chief Executive Officer, and Vice Chairman, Ganesh Kumar, Senior Executive Vice President and Chief Operating Officer, Maritza Arizmendi, Executive Vice President and Chief Financial Officer. A presentation accompanies today's remarks. It can be found on the investor relations website on the homepage in the What's New box, or on the Webcast Presentations and Other Files page. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to various risks and uncertainties outlined in the Risk Factors section of OFG Securities and Exchange Commission filings. Actual results may differ materially from those currently anticipated.
We disclaim any obligation to update information disclosed in this call as a result of developments which may occur afterwards. All lines have been placed on mute to prevent any background noise, after the speaker's remarks, there will be a question-and-answer session. I would now like to turn the call over to Mr. Fernández.
Good morning. Thank you for joining us today. I will review the quarter's results. Ganesh and Maritza will join us for the Q&A. As we've done in recent calls, we'll focus our prepared remarks on key highlights, then we'll open the call for questions. Please turn to slide three. This morning, we reported strong first-quarter results. Earnings were $0.29 per share. That is similar to the fourth quarter and 12% higher than a year ago. We experienced strong performance across the board. Net loans grew 8% on an annualized basis from the last quarter. New loan generation was more than $300 million in the quarter. Customer deposits increased 2% from December 31st, net interest margin expanded 14 basis points. Credit also performed well. Nearly all of our loan moratoriums expired during the quarter. Most of our credit metrics were better than or returned to pre-hurricane levels.
Our strong capital position continued to build. Tangible book value per common share increased 2.5% year-over-year to $15.71. Total risk-based capital ratio continued to exceed 20%. Please turn to slide four. Our first quarter results reflected both the success of our strategies and Puerto Rico's emerging recovery. Today marks seven months since Maria hit the island. Puerto Rico is now benefiting from a wide variety of factors. Loan payment moratoriums by Oriental and other banks, increased availability of electric power, improvement in communications, all of which has led to return of day-to-day stability. In addition, the island is benefiting from rebuild spending by FEMA, the start of payments of insurance claims, the prospect of a growing amount of federal funds. This has enabled OFG to return to our performance prior to the hurricanes and is setting the stage for potential future growth. Please turn to slide five.
Nearly every metric in the first quarter confirmed our progress. For the second quarter in a row, our originated loan growth outpaced the paydown of acquired loans. Auto, consumer, and mortgage loan production at $192 million increased 52% from the fourth quarter and more than 11% from the year-ago quarter. At a record $128 million, auto reflected consumers need to replace damaged vehicles, pent-up demand, and the market's effort to adjust to one less auto lending competitor. Consumer loan production rebounded more than 60%, exceeding pre-hurricane levels as retail customers began to replace needed items and repair homes. Mortgage loan production also rebounded more than 60% as it became easier to sell and buy homes again. Commercial loan production in Puerto Rico was lower than the fourth quarter, but up more than 13% year over year.
Our recently established OFG USA program added $74 million in commercial and industrial-related loans. These consisted of participations across a broad array of industries and geographies on the mainland. While pricing on originated loans declined six basis points, net interest margin got a boost from higher yield in investment portfolio and from cash balances. Please turn to slide six. Other business trends were positive or heading in the right direction. Fee revenue came back with a 24% sequential increase in banking services and a 43% increase in mortgage banking. Core wealth management held steady at pre-hurricane levels. Customer deposits increased $78 million while the cost of deposits continued to decline.
We are pleased to note that we benefited also from non-interest-bearing accounts totaling more than $1 billion for the first time. The efficiency ratio returned to pre-hurricane levels, but there were some seasonally higher expenses there. Please turn to slide seven. Credit quality remains stable. The net charge-off rate remained level with the fourth quarter. Within the mix, the rate for consumer lending increased, returning to pre-hurricane levels, while the rate for other categories remained flat or declined. Non-performing loan rate increased 51 basis points due to one commercial loan and auto loans coming off moratoriums. The commercial loan is for $10.5 million. It is current in its monthly payments, but we placed it in non-accrual due to credit deterioration post-Maria. Total delinquencies returned to pre-hurricane levels as most of the moratoriums expired.
You might recall, delinquencies fell during the fourth quarter due to lower inflows reflecting the automatic moratoriums we offered, and to a lesser degree, payments received on moratorium loans. Please turn to slide eight. If you recall, the third and fourth quarters included incremental provisions to increase the allowance for hurricane-related impacts on loans. In the first quarter, total provision fell more than $9 million from the fourth quarter to $15.5 million. Even with that decline, first-quarter provision included $8.6 million to replenish the allowance for retail loan charge-offs related to the hurricane. First-quarter provision also included an increase in allowance related to auto loan portfolio growth and for that one commercial loan placed in non-accrual that I mentioned earlier. As a result, we continue to increase our allowance both in dollars and in percentage of loans held for investments. Please turn to slide nine.
Another factor in our success has been our ongoing efforts to differentiate Oriental through superior service and digital banking technology, what we call our Vive la Diferencia strategy. This quarter, we introduced My Payments, Mis Pagos, enabling our loan-only customers to pay online instead of standing in line at a branch. As a result of efforts like this, we're proud to report net new customer accounts grew at an annualized rate of 8% in the first quarter. This significantly exceeds our 2% increase for the full year 2017, which was affected by the hurricanes, and it also exceeds our 5% rate in 2016. Please turn to slide 10 for our capital ratios. We'd like to point out that our capital metrics have continued at the high levels we saw in 2017, which were significantly higher than five years ago. Please turn to slide 11 for our outlook.
With power and telecom getting close to complete, although not reliable, restoration to day-to-day life has begun stabilizing for businesses and consumers. We're also starting to benefit from insurance money and federal spending trickling down through the economy. On a more personal level, we're beginning to see some optimism building on Puerto Rico's business leaders and entrepreneurs. I'm going to have to repeat some of what I said on the last call. Puerto Rico is far from being out of the woods. Short term, we're still waiting for insurance and federal money to really start flowing. Long term, we must develop a lasting solution to PREPA. Lower cost, reliable, resilient, independently regulated electric power is the single most important thing Puerto Rico needs today. We also must permanently resolve the island's fiscal problems. The fiscal plan approved yesterday by the Fiscal Board provides that opportunity.
It is time for the government to execute that plan without delays. As we've seen from these quarter results, OFG and Oriental are continuing to play a major role leading the way for consumers and businesses. While we remain cautious in the short term due to the uncertain economic environment on the island, we are confident positive momentum will prevail in the long term for OFG, Oriental, and Puerto Rico. Our goal is to continue to sharpen our focus on our retail and commercial clients, improve our service levels, expand our business, and build capital. With this, we end our formal presentation. Operator, please open the call for questions.
At this time, if you have a question, please press star one on your telephone keypad. Again, if you have a question, please press star one. Our first question comes from the line of Brett Rabatin with Piper Jaffray.
Hi. Good morning, everyone.
Good morning.
Good morning, Brett.
I have quite a few questions, but wanted to just, I guess, first start macro and this is probably the most optimistic I've probably heard you guys in a while, and probably more so than when I was on the island during the quarter. Assuming that the insurance monies do start to flow more, we had $7 billion more from HUD, the fiscal plan announced or I guess certified yesterday. Governor's not on board. Assuming monies flow heavier to the island in the next quarter or two, can this actually help the economy grow in the near term?
Brett, I think it's a little too early to tell. There are too many uncertainties still out there. Given our first quarter results, we're certainly cautiously optimistic. We had a very good quarter, we had terrific results, and we can't hide that reality. We also can't hide the fact that there are still too many uncertainties in Puerto Rico. Particularly yesterday, the fiscal plan that was approved, there is a clash between the government and the Fiscal Board in the implementation on how to implement some of those difficult measures. It seems to me that it's going to end up in a protracted legal bankruptcy process.
That process is going to be in the hands of a federal judge, and she needs to kind of put the ring around the collar, so to speak, so that we can, in reality, do the right thing from a fiscal perspective. I say this simply because from our business perspective, it's a little too early for us to say the economy's going to grow and we have here a great back wind coming in with federal funds because it seems to me that if the governor and the government of Puerto Rico fights the fiscal plan, the Treasury of the U.S. will also have a little bit of leverage with federal funds. We're a little bit uncertain on how those funds are going to flow if there is a protracted fight among the two main players in the island, the government and the Fiscal Board.
Okay. Wanted to maybe get a little thought process on just, one, I know the press release said that the $74 million in the U.S. was varied and across different industries. Was hoping to get maybe a little more color on that piece of the production, just granularity there. If we're thinking about 2018, and that continuing to bolster your portfolio, can we now assume that you guys might have loan growth in the 8%-10% range this year? Or can you give us maybe a little more color on your outlook for production on loans and then how you see the U.S. strategy aiding that?
Again, I'm going to let Ganesh give you the details, from a big picture, the way we got this going is primarily to diversify geographically, and that remains the main objective here. We had certainly a good quarter on that area. I'll let Ganesh give you some of the details.
Good morning, Brett. As José pointed out, the primary objective is prudently build a portfolio that is diversified not only in geography but also industries as well, right? The production primarily is made up of different credits in form of participations at this point in time. Though we plan to add whole loan purchases to the program during the course of the year, we are still working on possibilities. At this point in time, those participations came, the ticket sizes anywhere between $4 million-$10 million, well-diversified across manufacturing, transportation, and all those basic industries we understand over here, without any exposure to any esoteric businesses. In the credit quality, we are being very cautious as well in terms of the leverage and credit ratios.
We are trying to pick those companies, especially that have proven track record and have a hold on their respective markets, that we can feel comfortable about their future performance as well. Having said that, we are happy in terms of what the team has been able to do this quarter. At the same time, as I said last quarter, we do not have a number, specific target in play in our minds. We are going to be opportunistic to either continue at the same level or if we do not, we would probably prioritize the credit aspect of it first before going after any number. Yeah.
Okay. Fair enough. Maybe just one last one. Your delinquency trends are still basically below pre-hurricane levels. What would you expect from your various portfolios as we go forward, kind of given the insurance money showing up? Should delinquencies, in your view, top out here, or are you thinking they will go higher?
Brett, what I would say is We are certainly encouraged with the delinquency trends. There are some areas that we need to keep an eye on them. Our servicing teams are focused on making sure that proactively they identify those areas and work with the consumers to help them out. Again, given the uncertainties, we want to make sure that we give ourselves one more quarter to make sure that we feel the trends are moving in the right direction. We are certainly encouraged with the trends post-Maria and post-moratorium.
Okay. Great. Appreciate all the color.
Yep, you're welcome.
Our next question comes from the line of Alex Twerdahl with Sandler O'Neill.
Hey, good morning.
Good morning, Alex.
First off, wanted to ask for a little more color on the provision, the $8.6 million that was "used to replenish the allowance for retail loans charged off related to the hurricanes." Were there specific characteristics that made these charge-offs hurricane related versus the other charge-offs during the quarter?
Again, I'm going to give you a little bit big picture and I'll let Maritza answer that. We look at our provisioning based on our methodology. We remain, as we've been in the past, consistent with that methodology. I'll let Maritza give you some details.
Generally speaking, this quarter most of our moratorium expires and this charge-off related to clients that were participating under that moratorium and were related to the hurricane.
Okay, they were charge-offs of loans that were specifically on moratorium, came off, and then they were charged off for whatever reason.
Yes.
How should we think about the reserve methodology? I know you kind of touched on it there for a second, but over the next couple quarters, in the third and fourth quarter of last year, you put up, I think, something like $30 million plus of reserves that you specifically allocated towards the hurricanes. Should we expect additional charge-offs in subsequent quarters to cause an equal amount of replenishment? At what point do you think that $30 million, whatever you put aside for the hurricanes, actually will start to come down?
As José was mentioning before, we will consistently assess the adequacy of the allowance for loan losses each quarter, assessing the risk associated to the loan portfolio, including the risk from the hurricanes. We will need to see how each portfolio behaves, and we will assess that as time goes by.
Okay. José, I appreciate some of the commentary you had about the macro outlook for the island, and obviously still a lot of uncertainty out there following the hurricane, following the fiscal plan. You did put up a pretty nice quarter for loan originations. You've had some nice deposit flows. Do you think that this is kind of a blip following the hurricane, or do you think that some of these levels that we're seeing here are kind of more representative of a new normal and that the pipelines are still pretty strong, and we could see some of these type of origination paces and deposit growth paces continue at least for the next couple quarters?
The way we think about this is we had a very good quarter, it's going to be very hard to replicate this stupendous quarter on an ongoing basis given the uncertainties that we operate in. If we wouldn't have the uncertainties, we would address the results or conclude that the results are 100% due to the way we do business and the way we differentiate ourselves and how we're bringing in technology. We know that those things are making a difference, and we're very proud and happy about the results so far. I have to say, we operate in a very uncertain and difficult environment, and the headline news are hard to ignore. We are happy about our results, but we are cautiously optimistic. What I would point out to all of you is that let's see how the second quarter goes.
Once we have a call after the second quarter results, we could be more specific on how we see the rest of the year. There are still too many uncertainties out there, Alex.
Okay. Thank you very much for taking my questions.
You're welcome.
Your next question comes from the line of Joe Gladue with Merion Capital Group.
Yeah, good morning.
Good morning, Joe.
Good morning. I guess I first wanted to touch base a little bit on the loan production and I guess I'll ask about the commercial side first. I guess I'm looking for a little color on your feeling about the commercial side given I might have expected some increase just from people, businesses recovering from the hurricane and looking to rebuild. On the other hand, I know a number of businesses closed following the hurricanes and that would suggest declines. I guess I'm just wondering if you can help us out where you guys think that those, I guess, countervailing pressures fall out.
I think two things come to my mind. One is we have a pretty good pipeline going forward, but we also have to admit that the competition is pretty fierce. When we look at pricing and how aggressive some of these pricings are going in on the commercial side, we need to be cognizant of that too, in an economy that is still, even though showing signs of recovery, given what we have spoken earlier in the call, it's still a very competitive market, particularly on the commercial middle market, what we call middle market, which is our sweet spot, $1 million-$10 million type of loans. That's why I think you're going to see a more steady performance from the commercial business here in Puerto Rico for Oriental.
I think what you're going to see, this quarter's numbers is probably on the lower end of our range. Could probably be a little bit better in the next quarter. I wouldn't go further than that.
Okay. All right, I guess the next question, you touched on it a little bit there, but the loan pricing, again, noting that the average yield on non-acquired loans was down from fourth quarter to first quarter. Just wondering how much of that is competitive pricing on the island, how much of that is related to the U.S. portfolio, and where do you see that going?
It has to do a lot with the mix. When we have a larger component of auto and consumer, it helps us out. When also you have more participation there on the commercial side, the Puerto Rico and the U.S., then it pushes down the average yield on the production. That's what's moving it. In general, remember, we had a pretty good auto loan quarter in terms of production. We also added some additional commercial loans in Puerto Rico and the U.S., and that has a little bit of a pressure on the yield on that production.
Okay. I guess I'll just ask, I imagine there's a lot of deposit inflows on the island given this disaster funds and insurance funds. I just ask you to touch on the competitive environment in terms of deposit pricing.
I would say it's competitive. We're starting to see some players becoming a little bit more aggressive on CD pricing, and that's kind of where we're seeing it right now. We're also seeing a little bit of, on the deposit side, there is a little bit of a volatility given the insurance companies depositing funds with the banks in the island. That money is going to come in and out as they start paying the claims. In general, when we look at our bank, our retail side of the deposit client is doing very well. We're growing good clients. As we talked about in our prepared remarks, we're adding net new customers at a yearly clip of 8%. That is tremendous. I think that's a good boost for the deposit side of it.
On the commercial side, we're very encouraged with our non-interest-bearing deposit breaking the $1 billion, and that's also very encouraging for the relationships we have built through many years on the commercial side, on the small business and the middle and larger commercial relationships that we have. The trends for three quarters in a row have shown very positive trends on the deposit side. We're very happy with that. So far, we're not seeing the level of, let's say, pressure on increasing the cost of funds as you guys are seeing in some of the banks in the U.S.
Okay. All right. Thank you.
Thank you, Joe.
To ask a question, please press star one on your telephone keypad. Again, that's star one. Our next question comes from the line of Glen Manna with Keefe, Bruyette & Woods.
Hi, good morning.
Good morning, Glen.
I just wanted to ask you a question on the credit side because I think especially when you look at early-stage delinquencies, they compare so favorably with first quarter 2017, especially after the hurricane. Investors have questioned what would happen after your customers came off the moratorium. Would you say that significantly most of your customers that took advantage of a moratorium, had they not been paying, would have showed up in your early-stage delinquencies this quarter? Or is there still a portion that could kind of migrate in the second quarter?
We're still waiting and see. We're very encouraged with the numbers for this quarter. Remember most of the moratorium, almost all the moratoriums are done. Maybe we have a trickle of some moratorium still available. They ended at the end of February, so we only have March. We've said in the prior call, too, last quarter, where we're really going to see the aftermath of the moratoriums is in the month of March, which we're slightly talking about it here. The confirmation will come in the second quarter of the year. As I've said earlier, we're optimistic and cautiously optimistic about the trends here on the post-moratorium delinquencies.
Okay, great. You had mentioned the funding side before, it looks like that was a real win for you guys this quarter. Non-interest-bearing deposits breaking the $1 billion mark. They had kind of bounced around in the high $800 million.
Right.
Can you tell us if you have any idea where those deposits came from? Were they hurricane-related, and what your expectation for the stickiness of those deposits are?
Yeah. Most of those deposits are coming from existing relationships we've had on the commercial side and some new ones. It also is a reflection of the economy. There's a lot of cash in the economy, and the consumers are spending the money, and the money is going into some of our commercial clients, and they're making the deposits with us. I think it's a reflection on the early part of the recovery after Maria. As I said, I'd like to confirm these trends in the second quarter to see if we can continue to move forward with progress on the economic front in Puerto Rico.
Okay. Thank you for taking my question.
Yep, you're welcome.
Our next question comes on the line of Brett Rabatin with Piper Jaffray.
Hey, I just wanted to follow up on mortgage banking, which was really strong this quarter. One, was there anything from a fee perspective that was unusual? Secondly, this was basically as good as 4Q 2016, and much better than every quarter of last year, even pre-hurricane, in those numbers. Obviously, production was lighter than it could have been.
Yeah
Can the fee income side hang in there?
Mostly production. It's volume, and us being after the hurricane, we had a little bit of a holdback on the originating and selling. In the quarter, we had a little bit of an accumulation there, and that's why you're seeing higher fees. Also it has to do with higher production levels that we had in the quarter.
Okay. I just want to go back to the deposit account growth, 8%. Puerto Rico is obviously not growing population by 8%. Is the account growth reflective of wallet share, or are you actually taking market share from your competitors? How should we think about that account growth this quarter?
Let me give a little bit of a comment here, I'll let Ganesh answer that because he's actually very much involved in leading that effort with the retail team. I think it has a lot to do with the investments we've made in the past on technology and on people. It's starting to pay off to us. I'll let Ganesh go a little bit more in detail on that.
We do have positive reputation, as José pointed out. We are also having very aggressive efforts in our channel points to convert the one-service customer, namely the loan customers, into a deposit customer as well. Those efforts have paid off a little bit, and that's what you're seeing over here, Brett. If you're asking me, are we taking market share? Maybe it's more of increasing the wallet share than taking market share.
Okay. Thanks for that. Then just lastly, Puerto Rico banks have been on hold for any kind of real capital deployment. I guess from an investor perspective, how do you sort of gauge the prospects of maybe using some of your excess capital this year? Or should we basically still, you think, have to wait until next year for anything meaningful to develop on that front?
I think, Brett, that as we continue to deliver results as we've been doing in the last two quarters after Maria, as the economy and hopefully the fiscal authorities in Puerto Rico execute on a fiscal plan that gives confidence to business people and investors alike. I think regulators will also come into the fray and feel more comfortable about the dialogue that we continuously have regarding capital management and capital deployment. I am, again, repeating myself by saying that we are cautiously optimistic about that too, given the results so far.
Okay. Appreciate all the color. Thanks.
Yep, you're welcome.
Again, if you would like to ask a question, please press star one on your telephone keypad. At this time, there are no further questions. I would now like to turn the call over to management for closing remarks.
Thank you, operator, and thank you all for listening in today. Looking ahead, we'll probably be scheduling our second quarter conference call for Tuesday, July 24th. We'll be participating in the Piper Jaffray Bank Conference in Palm Beach on May 15th. Until then, thank you again to everyone, and have a good day and a great weekend.
This concludes today's conference call. You may now disconnect.